Volatility, Risk Aversion, and Portfolio Management

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Volatility, Risk Aversion and Portfolio Management Table of Contents Abstract 3 Volatility 4 High-Frequency Trading Impact on Volatility 5 Utility 6 Risk Aversion 7 Portfolio Management 7 Single-Index Model 9 Capital Asset Pricing Model 9 Arbitrage Pricing Theory 10 Modern Portfolio Theory 10 Treynor Theory 11 Sharpe Theory 12 Sortino Theory 12 Post-Modern Portfolio Theory 13 Value at Risk Method 13 Historical Data Method 14 Normal Probability Distribution Method 14 Monte Carlo Simulation Method 15 Conclusion 17 References 18 Abstract The purpose of this write-up is to provide insight on volatility, risk aversion, and portfolio management. These are all subjects that should be on the minds of not only large firms, but also the average consumer. In order to develop a successful portfolio, one must understand volatility, risk aversion, and portfolio management models. The paper opens with an overview of volatility and how it can be measured using tools such as standard deviation and beta. There have been recent discussions around volatility and whether or not high volatility equals high returns. This section is followed by a study conducted by Mani Mahjouri that addresses the question of volatility and return. Utility is the next topic of the paper which covers the very basics of the term and goes into risk aversion. This section discusses how more people are taking smaller risks and accepting steady returns. The final portion of the write-up is focused on portfolio management and the questions that need to be answered before starting a portfolio such as what is the reason for starting it, what is the specific timeline of the portfolio, and what is the expected rate of return. These are all questions that need to be answered prior to starting a portfolio. This section is followed by the different types of models used to do so.

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